As Microsoft Corporation (NASDAQ:MSFT) prepares to announce third-quarter earnings on April 27, a lot of analysts are pounding the table for MSFT stock. Including writers at InvestorPlace.
Profits from the cloud and hardware keep growing, as does the dividend, writes Aaron Levitt. Artificial intelligence will cause a major rally, writes Joseph Hargett. A collar strategy can help you grab your share of the action, adds Chris Tyler.
All this is true. The company is expecting 69 cents per share of earnings and revenue of $23.62 billion in its next report. That would mean 7% growth on the top line over 2016, and 12.9% growth on the bottom line. Not too shabby.
But there is a cloud overhanging this story, and the great stories of all Big Tech stock for that matter. That is, governments around the world are seeing foreign tech stocks as tax scofflaws, and are lining up to collect.
Business Is Fine, People Are Wonderful
On the surface, everything seems good at Microsoft. The company is competing fiercely against its cloud rivals, and winning.
The Azure cloud is a growing threat to Amazon.com, Inc.’s (NASDAQ:AMZN) Amazon Web Services, according to analysts. Microsoft is delivering new marketing solutions through an alliance with Adobe Systems Incorporated (NASDAQ:ADBE), the two clouds operating in tandem to create and test advertising graphics.
Microsoft is also coming after Apple Inc. (NASDAQ:AAPL) in the PC business. Its control over the game market is big enough for it to ban emulators of other systems. It is improving the security of its Office 365 suite against Alphabet Inc (NASDAQ:GOOG, NASDAQ:GOOGL), so that hackers who are locked out of e-mail can’t just offer their malicious links in Word documents.
From a business standpoint, Microsoft is running on all cylinders. Its scale means there are fewer companies that can compete with it, and it is successfully competing with those companies that remain.
What could go wrong?
The Taxman Cometh
It makes for a great headline — “Mums and dads pay tax, they can’t avoid it,” and tech must pay its fair share. The politician often says this with a smile.
Governments want information, not just money. They don’t like Microsoft funneling its money through Ireland, so it can just pay and avoid paying others. When tax reform is discussed, the primary target now is often the biggest tech companies, and their biggest stockholders.
This is not just a game foreigners play. The Trump administration’s plans for a “border adjustment tax” are based, in part, on an investigation of how Microsoft used Puerto Rico to avoid U.S. taxes.
It’s also not just a game for national governments. San Francisco is reportedly considering a tax on robots, to compensate government for the labor savings they create. This is a sea change in government attitudes toward technology. In the past, the lure of getting tech offices led government to offer all sorts of incentives for tech companies to locate operations there, and allowed them to funnel their money through these offices. Now tech is being seen by government as a giant piggy bank ripe for the cracking.
The impact could be huge.
In 2016, Microsoft reported paying about $3 billion in taxes, earning $19.751 billion before taxes and $16.798 billion after. That’s an effective rate of 15%. The U.S. corporate tax rate, however, is 39.1%. The Trump Administration says it wants to drop that rate to the 15% Microsoft is currently paying, although the tax plan he offered in February did not include a 15% corporate rate. And without the new border tax there may be no drop in the corporate rate at all. That sounds like a net tax increase to me.
If the rumblings from global tax authorities turns into a roar, it’s going to hit companies like Microsoft hard, and analysts aren’t factoring this into their calculations on future profits at all.
Dana Blankenhorn is a financial and technology journalist. He is the author of the sci-fi novella Into the Cloud, available at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in GOOGL, AMZN, MSFT and AAPL.
